It may seem strange that Foseco has posted a loss at what appears to be the fag end of the commodity cycle, after maintaining a continuous track record of profitability. Foseco India has sunk into the red with a loss of Rs 1.5 crore last quarter compared to a profit of Rs 95 lakhs in the corresponding period last year.

This loss looks worse if one were to consider the change in the depreciation policy followed by the company. The company has changed the depreciation from WDV to SLM method. Ideally the effect of the change in policy depends on the remaining life of total assets. Although that cannot be directly ascertained, last year figures if recast on SLM basis would show a lower charge, indicating that the change in the policy has resulted in lower depreciation charges in the current quarter under review.

Also, at first glance Foseco's loss may be attributed to the dismal performance of one user industry-- steel foundries. Foseco manufactures specality chemicals for use in foundryapplications and for producers manufacturing textile machinery.

But these explanations for Foseco's loss are simply not true. The loss is mainly due to extraordinary expense undertaken by the company to restructure its operations. These expenses were Rs 3.6 crore, compared to Rs 1.08 crore in the same period last year.

Adjusting for this extraordinary expenditure, operating margins in the last quarter have gone to 19 per cent from 15 per cent in the corresponding period last year, indicating that the cost cutting exercise undertaken by the management has already started yielding results.

Of course the closure of foundries in Agra and other places in India for environmental reasons have affected volumes. Apart from drop in volume sales, these closure has also seen the rise in debtors.

The company follows a very conservative accounting policy. In the last quarter they have provided provisions for doubtful debts at Rs 45 lakh. These provisons do not mean that the company gives up hope of recovering themoney. Going by past experience in fiscal 1997-98, the company recovered Rs 8.11 lakh, which was earlier written off as doubtful debts.

The spurt in auto demand has already pushed up production of iron casting produced in the foundries, which would mean higher sales to the company in the current quarter. Presently industry majors such as Tisco and SAIL have enhanced production targets for ingot casting, material which means that even if the closed foundries do not get environmental clearance, their share would be taken up by the industry majors. This would be good news for Foseco India Ltd.

Inspite of the drop in volumes in the steel busines, there was hardly any drop in turnover which remained stagnant at Rs 18 crore. The company made up for most of its losses for supply of specality chemicals to foundry units by spurt in demand from manufactures of textile machinery. Textile and industrial machinery have recorded exceptionally good growth. According to the latest CMIE data, output of textile machineryin value terms remained above Rs 100 crore for the sixth consecutive month. This is one third more than the output in April 1998.

With market demand improving and the restructuring exercise yielding results it should not be long before the markets sit up and take notice. The return on capital employed has been consistently at 30 plus levels. Once the present VRS scheme and modernisation program is over, ROCE should rise agian. This is bound to improve valuations.

Siemens

Finally Siemens has managed to show a positive bottomline in the third quarter of the current fiscal. It reported a profit of Rs 1.82 crore as compared to a loss of Rs 15.25 crore in the corresponding period of the previous year. This has been mainly possible due to a higher other income of Rs 10.12 crore as compared to Rs 6.65 crore in the previous year. Siemens has recorded a profit before exceptional item and tax of Rs 3.7 crore.

That doesn't mean, however, that Siemens hasn't done well operationally. Siemens has managed toshow an operating profit, with a margin of 4.2 per cent. This is creditable considering the fact that there was a severe price war in the market, with increased competition. In fact for some of the products prices were as low as 1995-96 levels. A sharp reduction in manpower cost has helped.

Restructuring has been one of the major factors that has helped in better cost control. Take for example the company's policy of hiving off its Nasik industrial electronics facility which manufactured printed circuit board (PCB). This factory mainly catered to the in-house requirement of the company. But with new technology PCBs have been replaced with chips which means that captive consumption of these boards declined. Thus in order to utilise the capacity fully, the company decided to hive-off this unit so that it could cater to outside clients. The same logic was used to hive off the Kalwa tool room facility into a 100 per cent subsidiary. It is bold measures like these that have led to the company recording aturnaround.

Apart from the activities on the operational front, the company has managed its finances well. In the third quarter, after a very long time the company has managed to show enough profits from its operations to cover its interest cost. Interest cost has declined sharply from Rs 15.97 crore to Rs 6.24 crore, mainly on account of the preference issue to the tune of Rs 107 crore, which was used to retire high cost debt. Now the company is planning to come out with a Rs 142 crore rights issue at Rs 200 to redeem the preference shares. The parent company, Siemens AG, has agreed to pick up the unsubscribed portion.

The company during the year has performed well in power transmission and transmission and projects businesses. With a possibility of the economy reviving, the company is well placed to capitalise on it. The signs are visible in its order book position, which has shown a marked improvement from Rs 585.9 crore to Rs 955.7 crore for the nine months ended June 1999. It is however, unlikelythat the company will be able to wipe out its entire accumulated losses in the current fiscal, as these stood at Rs 61.52 crore as on June 1999.

Gabriel India

Fortunes in the auto ancillary sector are indelibly linked to those of the automotive sector. No where is this fact more apparent than in the first quarter results recorded by Gabriel India. After posting a net loss of Rs 1.89 crore for the twelve months ended March 1999, the company has bounced back into the black with a net profit of Rs 0.68 crore in the first quarter ended June 1999.

What with a clientele like Ashok Leyland, Telco, Maruti Udyog and Bajaj Auto, need one explain the revival in the company's fortunes any further? That three of the four players have themselves borne witness to a strengthening recovery trend in 1999-00 is already a well established fact. No surprise then that sales at Gabriel for the first quarter at Rs 55.99 crore have actually improved a solid 22.95 per cent.

There is additional good news in the form ofbuoyant operating margins which have also improved from 13.02 per cent to 13.91 per cent. Thanks largely to improved working capital management and stringent cost control, especially over material input costs. In fact, it is due solely to the revenue growth and containment of costs that Gabriel has ended the first quarter with a net profit of Rs 0.68 crore, compared to a net loss of Rs 1.21 crore in the corresponding quarter last year.

With indigenisation fast becoming the key to profitability in the automotive segment, domestic auto ancillary units now have the oppurtunity to capitalise on the automotive company's need for a reliable vendor base. The positive trend in vehicular offtakes is obviously another bearer of good news and in fact, is mirrored in the sentiment for the company's stock. The Gabriel scrip which had been on a continual southward spiral since last year appears to have finally bottomed out at Rs 46 in May, before recovering to a respectable level of Rs 73 currently. For the future, thecapacity expansion in ride control components and bimetal bearings will hold the company in good stead.

(With contributions from Manish Saxena, Shishir Asthana and Percy Dubash)